OIS gives 90% certainty of rate cut, but the market is betting on the wording: Canadian dollar bulls and bears are waiting for that sentence
2025-09-17 18:14:53
USD/CAD continued its relative weakness during the European session on Wednesday (September 17th), trading around 1.3750 amidst a mid-term decline. With the Bank of Canada (BoC) expected to announce its interest rate decision at 9:45 PM tonight and hold a subsequent press conference, the pre-event "spread-volatility" game is heating up. Pre-market liquidity and spreads are expected to widen temporarily.
The consensus market expectation is that the Bank of Canada will cut its overnight target rate by 25 basis points to 2.50%, following three consecutive periods of unchanged policy. The upward trend in the probability of easing stems from three key factors: first, significantly weaker growth—the actual economy contracted at an annualized rate of 1.6% in the second quarter, significantly worse than expected; second, weak employment—the combined employment loss in July and August exceeded 100,000, pushing the unemployment rate to 7.1%; and third, generally manageable inflation—the CPI for August was 1.9% year-on-year, below the forecast of 2.0%, with the median core CPI remaining at 2.6%.
Within this framework, CIBC analysts noted that August inflation "did not pose a threat," making this rate cut "a relatively easy decision." However, the pause at the July 30th meeting reminded the market that the pace of rate cuts remains constrained by sticky inflation. Governor Tiff Macklem has emphasized that preferred indicators, such as the modified mean and median, remain around 3%, and that the Board will remain vigilant if stickiness persists.
At the same time, marginal changes in the exchange rate and wages are creating a "drag-and-buffer" effect on inflation: a strong Canadian dollar, slowing wage growth, and a negative widening of the output gap are all likely to depress the medium-term inflation path. The National Bank (NBC) predicts that after three consecutive wait-and-see periods, the Governing Council will "cut the interest rate by 25 basis points to 2.5%." The OIS implies a roughly 90% probability of a rate cut.
Therefore, the risk point this time is more shifted to forward guidance - if the statement emphasizes "data dependence + inflation remains sticky", it may be interpreted as a slowdown in the pace; on the contrary, if it directly points to the fatigue of employment and growth and implies that there is still room for follow-up, the front end of the easing curve may sink further, and the Canadian dollar will be under pressure in the short term.
Looking at the 4-hour chart, the middle Bollinger Band is at 1.3805, the upper Bollinger Band at 1.3893, and the lower Bollinger Band at 1.3716. After retreating from the double highs of 1.3889-1.3924, the exchange rate has fallen below the middle band and is trading near the lower band. Currently, there is limited distance between 1.3754 and the lower band, indicating a short-term "weakening within the band and retracement to the lower band." Near-term lows of 1.3725 and 1.3730 (and earlier, 1.3721) form a dense support cluster, which, combined with the lower band at 1.3716, forms a critical defensive zone between 1.3725 and 1.3716.
MACD shows: DIFF is -0.0023, DEA is -0.0019, both below the zero axis and DIFF is slightly lower than DEA, the histogram is -0.0008, the momentum is bearish and still being released, and the trend continues to dominate. RSI (14) reading is 32.9843, approaching but not yet reaching the traditional oversold threshold of 30, indicating that "the weakness is not extreme". In terms of resistance, the middle Bollinger band of 1.3805 is the first upward test. If it returns above it, we can talk about the second confirmation of 1.3878/1.3889 and the upper band of 1.3893, and then the previous high of 1.3924; if the support band of 1.3725-1.3716 is lost, the bearish rhythm may accelerate, and the psychological barrier of 1.3700 will become the next level of observation.
With the OIS almost fully priced in a 25bp rate cut, market pricing is focused on two key points: 1) the tone and trajectory of the announcement and press conference; and 2) the weighting of the "sticky core inflation ≈ 3%" target. In terms of event structure, if the rate cut proceeds as expected and neutral/slightly hawkish guidance is adopted, there is a risk of a typical "realization of negative news" technical pullback, potentially leading to short-term strength in the Canadian dollar and a pullback to test 1.3725-1.3716. If the rate cut proceeds as expected and further easing signals strengthen, the front end of the curve will decline again. Against the backdrop of cooling risk appetite, funds may favor a defensive stance, potentially pushing the exchange rate back above 1.3805.
Short-term (event-driven, 1-3 days):
Bearish Scenario (Upward): If the statement reinforces the weakness in growth and employment and suggests openness to further easing, bearish sentiment will persist, with the US dollar interest rate differential and safe-haven demand resonating. The exchange rate could retest the 1.3805 midpoint before challenging 1.3878/1.3889 and 1.3893. Strong resistance remains at 1.3924. This range is prone to a "false breakout-retracement-reselection" pattern. Watch for the MACD to signal a trend transition, with negative convergence and an upward shift to the zero line.
Bullish Scenario (Downward Price): If the statement emphasizes inflation stickiness and policy patience, or hints at an "evaluation period," a technical rebound driven by "expectation differentials" could push the Canadian dollar lower. We will observe whether the 1.3725-1.3716 range can be successfully broken. If a candlestick closes below 1.3716 and a retest fails, downside potential will open up, bringing the psychological level of 1.3700 into view. The RSI dips below 30 and then retreats to around 30, forming a typical pattern of "weakness repair followed by further downward pressure."
Fundamentals: Expectations of easing are rising, but guidance will determine the direction
The consensus market expectation is that the Bank of Canada will cut its overnight target rate by 25 basis points to 2.50%, following three consecutive periods of unchanged policy. The upward trend in the probability of easing stems from three key factors: first, significantly weaker growth—the actual economy contracted at an annualized rate of 1.6% in the second quarter, significantly worse than expected; second, weak employment—the combined employment loss in July and August exceeded 100,000, pushing the unemployment rate to 7.1%; and third, generally manageable inflation—the CPI for August was 1.9% year-on-year, below the forecast of 2.0%, with the median core CPI remaining at 2.6%.
Within this framework, CIBC analysts noted that August inflation "did not pose a threat," making this rate cut "a relatively easy decision." However, the pause at the July 30th meeting reminded the market that the pace of rate cuts remains constrained by sticky inflation. Governor Tiff Macklem has emphasized that preferred indicators, such as the modified mean and median, remain around 3%, and that the Board will remain vigilant if stickiness persists.
At the same time, marginal changes in the exchange rate and wages are creating a "drag-and-buffer" effect on inflation: a strong Canadian dollar, slowing wage growth, and a negative widening of the output gap are all likely to depress the medium-term inflation path. The National Bank (NBC) predicts that after three consecutive wait-and-see periods, the Governing Council will "cut the interest rate by 25 basis points to 2.5%." The OIS implies a roughly 90% probability of a rate cut.
Therefore, the risk point this time is more shifted to forward guidance - if the statement emphasizes "data dependence + inflation remains sticky", it may be interpreted as a slowdown in the pace; on the contrary, if it directly points to the fatigue of employment and growth and implies that there is still room for follow-up, the front end of the easing curve may sink further, and the Canadian dollar will be under pressure in the short term.
Technical aspects:
Looking at the 4-hour chart, the middle Bollinger Band is at 1.3805, the upper Bollinger Band at 1.3893, and the lower Bollinger Band at 1.3716. After retreating from the double highs of 1.3889-1.3924, the exchange rate has fallen below the middle band and is trading near the lower band. Currently, there is limited distance between 1.3754 and the lower band, indicating a short-term "weakening within the band and retracement to the lower band." Near-term lows of 1.3725 and 1.3730 (and earlier, 1.3721) form a dense support cluster, which, combined with the lower band at 1.3716, forms a critical defensive zone between 1.3725 and 1.3716.
MACD shows: DIFF is -0.0023, DEA is -0.0019, both below the zero axis and DIFF is slightly lower than DEA, the histogram is -0.0008, the momentum is bearish and still being released, and the trend continues to dominate. RSI (14) reading is 32.9843, approaching but not yet reaching the traditional oversold threshold of 30, indicating that "the weakness is not extreme". In terms of resistance, the middle Bollinger band of 1.3805 is the first upward test. If it returns above it, we can talk about the second confirmation of 1.3878/1.3889 and the upper band of 1.3893, and then the previous high of 1.3924; if the support band of 1.3725-1.3716 is lost, the bearish rhythm may accelerate, and the psychological barrier of 1.3700 will become the next level of observation.
Market Sentiment Observation: Pricing is "90% Certain," Volatility May Be "Buy Expectations, Sell Facts"
With the OIS almost fully priced in a 25bp rate cut, market pricing is focused on two key points: 1) the tone and trajectory of the announcement and press conference; and 2) the weighting of the "sticky core inflation ≈ 3%" target. In terms of event structure, if the rate cut proceeds as expected and neutral/slightly hawkish guidance is adopted, there is a risk of a typical "realization of negative news" technical pullback, potentially leading to short-term strength in the Canadian dollar and a pullback to test 1.3725-1.3716. If the rate cut proceeds as expected and further easing signals strengthen, the front end of the curve will decline again. Against the backdrop of cooling risk appetite, funds may favor a defensive stance, potentially pushing the exchange rate back above 1.3805.
Market Outlook
Short-term (event-driven, 1-3 days):
Bearish Scenario (Upward): If the statement reinforces the weakness in growth and employment and suggests openness to further easing, bearish sentiment will persist, with the US dollar interest rate differential and safe-haven demand resonating. The exchange rate could retest the 1.3805 midpoint before challenging 1.3878/1.3889 and 1.3893. Strong resistance remains at 1.3924. This range is prone to a "false breakout-retracement-reselection" pattern. Watch for the MACD to signal a trend transition, with negative convergence and an upward shift to the zero line.
Bullish Scenario (Downward Price): If the statement emphasizes inflation stickiness and policy patience, or hints at an "evaluation period," a technical rebound driven by "expectation differentials" could push the Canadian dollar lower. We will observe whether the 1.3725-1.3716 range can be successfully broken. If a candlestick closes below 1.3716 and a retest fails, downside potential will open up, bringing the psychological level of 1.3700 into view. The RSI dips below 30 and then retreats to around 30, forming a typical pattern of "weakness repair followed by further downward pressure."
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